The time might be right to take a shine to gold funds
— -- Not too long ago, people who warned about the collapse of the banking system were called doom-and-gloomers. Nowadays, they're called central bankers.
If you're among the ranks of the petrified, you should consider investing in gold. But don't go overboard: A portfolio too heavily weighted with gold can sink like lead.
Gold has a special place in monetary history not only because it's beautiful, but because it's rare, it doesn't rust, and it's easily portable. In short, it's a perfect metal for currency.
In these days of paper money, gold has become best known as an inflation hedge. When paper dollars decrease in value, people put their trust in real assets, such as gold. When gold hit $850 an ounce in 1980, consumer prices were soaring at 12.5% a year.
Gold soared to $858 an ounce Thursday from a low of $712 an ounce in October — which is peculiar, because inflation has been deader than King Tut's grandmother. The consumer price index, the government's main gauge of inflation, fell 0.7% in December on a seasonally adjusted basis. It rose just 0.1% for all of 2008, according to the Bureau of Labor statistics.
Even more peculiarly, gold has soared while the value of the U.S. dollar has risen. Normally, the two move in opposite directions.
What gives? In a word: fear.
Although gold is an inflation hedge, it's also a catastrophe hedge. During the Civil War, for example, traders would sell greenbacks on news of a Confederate victory, and buy gold. They didn't want to get caught holding worthless U.S. paper money.
Although the nation is far from civil war, the economic system is profoundly stressed. Credit is still tight, even though the Federal Reserve has dropped the key fed funds rate from 5.25% in 2006 to somewhere between zero and 0.25% today. Wall Street is terrified that banks will continue to roll out massive losses. "The banking and financial system is deteriorating," says Joe Foster, portfolio manager for Van Eck International Global Investors Gold fund.
